Investor Optimism Abounds Beijing Telesound Electronics Co., Ltd. (SZSE:003004) But Growth Is Lacking

When close to half the companies in the Commercial Services industry in China have price-to-sales ratios (or "P/S") below 2.5x, you may consider Beijing Telesound Electronics Co., Ltd. (SZSE:003004) as a stock to avoid entirely with its 6.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Beijing Telesound Electronics

How Beijing Telesound Electronics Has Been Performing

As an illustration, revenue has deteriorated at Beijing Telesound Electronics over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Beijing Telesound Electronics will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Beijing Telesound Electronics?

The only time you'd be truly comfortable seeing a P/S as steep as Beijing Telesound Electronics' is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. The last three years don't look nice either as the company has shrunk revenue by 20% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 28% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Beijing Telesound Electronics' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Beijing Telesound Electronics currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Beijing Telesound Electronics (of which 2 shouldn't be ignored!) you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.